Introduction

North American economic relations under Trump 2.0

As the United States, Mexico, and Canada begin discussions in the run up to the 2026 review of the United States-Mexico-Canada Agreement (USMCA), we compiled a series of expert papers that sought to identify areas where strengthening U.S. cooperation with Canada and Mexico are needed to achieve key economic and national security goals for the U.S., such as access to critical minerals, development of batteries and electric vehicles (EVs), and strong leadership in AI—and where USMCA reform can help achieve these goals. This report includes chapters that contains scholarly analyses of critical issues, often complemented by “viewpoints”, which are opinion pieces from leaders in business, government, or civil society with a stake in the outcome of this agreement.

This report comes at a time when the economic relations between the U.S., Canada, and Mexico are particularly fraught. At the time of print, the U.S. has imposed a 25% tariff on most imports from Canada and Mexico, and Canada and Mexico will retaliate with their own tariffs, with likely escalation from the U.S. This will result in a major trade war among the United States’ largest trading partners. As former Deputy U.S. Trade Representative in the first Trump administration C.J. Mahoney notes in his contribution to the report, the question is whether the USMCA will even survive 2025.

President Donald Trump claims that these tariffs are needed to address flows of fentanyl and illegal migrants. What is clear is that a 25% tariff will reduce economic growth, diminish jobs, and cut wages, and these economic harms will be magnified by retaliation. A clear winner from a trade war between the U.S., Canada, and Mexico will be China as it undercuts efforts to reshore supply chains away from China into North America. The willingness of the U.S. to impose tariffs on its largest trade partners will also force U.S. allies and trading partners to reduce their trade reliance on the U.S., including possibly expanding trade and investment relations with China.

While the focus on trade relations with Canada and Mexico since President Trump took office has been relentlessly negative, the actual reality is that trade ties across North America are strong, and exports among the three countries support over 17 million jobs. Canada and Mexico are also emerging as key U.S. partners when it comes to rebuilding manufacturing and competing with China. Canada and Mexico are the United States’ first and second largest export markets with U.S. goods exports to these countries worth around one-third of total U.S. exports. The U.S. is also the largest export market for Canada and Mexico with around 83% of Mexico’s exports and 78% of Canada’s exports going to the U.S. The trade relationship between the U.S., Canada, and Mexico is underpinned by the USMCA, a comprehensive agreement that President Trump negotiated during his first term in place of North American Free Trade Agreement (NAFTA).

This report focuses on a couple of key areas where deepening cooperation between the U.S., Mexico, and Canada is necessary to rebuild manufacturing and compete with China, particularly around the production of critical minerals, EV manufacturing, and the development of a more digital North America that leads on artificial intelligence (AI), including high-end semiconductor manufacturing. When it comes to critical minerals and EVs, China is currently the global leader, and the release of DeepSeek—a Chinese AI large language model (LLM) that was trained at a fraction of the cost of equivalent U.S. LLMs—has underscored that despite U.S. export controls, China is catching up on the United States’ AI leadership. As this report outlines, building on complementarities across the U.S., Canada, and Mexico is the best strategy for ensuring that the U.S.—and North America as a region—regains and retains its leadership in these key sectors.

This report is particularly timely given that USMCA is up for review next year. Under USMCA, by July 1, 2026, all the parties must agree to extend the agreement for another 16 years. Failure to agree to extend the USMCA in 2026 will lead to annual reviews of the agreement. Should the parties fail to agree to extend USMCA by 2036, the agreement will expire. Failure to agree to extend USMCA in 2026 is therefore not immediately fatal, as there is a 10-year runway before the agreement expires. However, failure to extend the term in 2026 will create significant uncertainty for businesses, leading to reduced investments across all three countries that will be economically costly and delay the investments needed to develop these industries and compete with China. Indeed, this is what happened during President Trump’s first term, when the business uncertainty caused by the renegotiation of NAFTA into USMCA depressed investment in the U.S., Canada, and Mexico.

What has USMCA achieved so far?

USMCA was negotiated by President Trump and came into effect on July 2, 2020. The limited time the agreement has been operational, as well as the existence of phase-in periods for some of the USMCA auto commitments for instance, means that it is too early to assess with certainty the agreement’s success or failure. That said, since USMCA came into effect, U.S. exports to Mexico and Canada have increased by 46%. Against this backdrop, the contributors to this report from the three countries and across industry, labor groups, and civil society all see the agreement as a success, if a qualified one, and see the USMCA review in 2026 as an important opportunity to update the agreement to achieve key economic and strategic goals.

When assessing the impact of USMCA compared with NAFTA, particularly in areas where USMCA differed with NAFTA (e.g., autos), the early results are positive. Under USMCA, the local requirements for automobiles to qualify for zero tariffs increased from 62.5% to 75%. The agreement also included a new requirement that 40% to 45% of the vehicles’ production must be made by workers earning at least $16 per hour, and 70% of a vehicle’s steel and aluminum purchases must originate in North America. A report by the U.S. International Trade Commission on USMCA auto chapter concluded that the agreement has “increased employment, production, revenue, capital expenditures, and profits as a result of ROOs.”

Another key USMCA innovation was to include binding commitments on labor standards as well as a rapid response mechanism (RRM) that allows for the U.S. and Canada to initiate complaints with the Mexican government about facilities with specific labor rights violations and apply tariffs to imports from those facilities in the event the labor issues are not resolved satisfactorily. Since USMCA came into effect, the U.S. has brought 32 RRMs against businesses in Mexico in the auto sector mainly, but also in glass, leather, rubber, small arms ammunition, and component parts manufacturing. Almost all of the issues were resolved to U.S. satisfaction.

As for the case for organized U.S. labor, the USMCA labor commitments have fallen short. AFL-CIO President Liz Shuler in her contribution to the report argues that more is needed to respond to concerns about how trade affects U.S. labor standards and wages. A key concern is when companies threaten to move jobs to Mexico to avoid raising wages and increasing benefits. There is an important debate over the extent in which the USMCA can increase average wages in Mexico. Research and contribution by Santiago Levy for the Brookings USMCA initiative found that the Mexican exporting sector is too small for USMCA to overcome the drag on wages caused by the informal economy in Mexico.

While the overall assessment of USMCA is that it has been a qualified success, the COVID-19 pandemic and the resulting economic developments since then—as well as rising geopolitical tensions with China—have also revealed the limits of the agreement. Moreover, as the U.S. has raised tariffs on imports from China, concerns have arisen about the scope for Chinese products to circumvent these tariffs by entering the U.S. via Mexico and Canada. As Pedro Casas Alatriste from the American Chamber of Commerce of Mexico notes in his contribution, “Mexico must ensure it does not become a productive platform for exporting Chinese goods to the U.S.” Indeed, a common theme in this report is how USMCA can be updated to support manufacturing, reduce dependence on China for critical products, and develop more secure and less China-centric supply chains. This includes the U.S., Canada, and Mexico aligning more closely on tariffs on imports from China and similar approaches to screening Chinese investments.

Opportunities for USMCA reform; a more competitive North America

These challenges are also opportunities to review the agreement and update it as needed to further strengthen North American competitiveness. Indeed, Mahoney argues that “the best way to preserve USMCA is for the parties to double down on the project of North American economic integration and competitiveness.” In his viewpoint, Marcelo Ebrard Casaubon, Mexico’s Secretary of Economy, also emphasizes the importance of sustaining and deepening North American economic relations that strengthen all three countries. Candace Laing, President and CEO of the Canadian Chamber of Commerce, frames the opportunity as developing a North American economic security agenda that would leverage the resources of the three countries to build more competitive and secure North American supply chains and collectively respond to the non-market and unfair trade practices of China. And in her contribution, Judy Marks, CEO and President of Otis Worldwide Corporation argues that the parties need to assess how USMCA could do more to support an integrated manufacturing platform that ensures North American competitiveness and security.

This year’s report focused on three areas where expanding and deepening cooperation between the U.S., Canada, and Mexico are needed, and where USMCA presents an important opportunity to do just that. These areas are increasing mining and refining of critical minerals, developing a North American supply chains for EVs, strengthening the North American technology ecosystem with a focus on expanding semiconductor manufacturing, and developing AI.

Securing the supply of critical minerals and rare earth in North America

Critical minerals and rare earths are key inputs into the production of many technologies, such as batteries, mobile phones, and semiconductors and needed for defense purposes. Judy Marks underscores the importance of critical minerals for producing the technology that forms “the backbone of modern advanced manufacturing industries.” This includes what Melissa Barbanell, director at the World Resources Institute, refers to in her chapter as energy transition minerals that are needed for the clean energy transition and used to produce wind turbines, solar panels, EV batteries, and more. As all authors addressing critical minerals note, the challenge for North America is the heavy dependence on many of these minerals from China, particularly when it comes to processing. The Trump administration has also made secure supply chains a focus, and this will require addressing the heavy reliance on China for critical minerals. China’s recent announcement that it will restrict exports of various critical minerals to the U.S. in response to U.S. tariffs further underscores the strategic need for the U.S. to reduce this dependency. Barbanell notes that the U.S. is 100% reliant on imports of 16 critical minerals such as graphite and more than 50% reliant on imports for another 29 critical minerals, including rare earths, zinc, and nickel. About 40% of U.S. import of critical minerals come from Canada and Mexico. Moreover, the U.S., Canada, and Mexico have largely complimentary resources, meaning that U.S. support for the development of critical minerals and rare earths in Canada and Mexico does not compete with U.S. production but can replace existing dependencies on China. As Jérôme Pécresse, Chief Executive at Rio Tinto Aluminum notes in his contribution, “there has never been a more important time to demonstrate the benefits of cross-border, resilient supply chains for critical minerals.”

Reducing the dependency on China for critical minerals and developing a more North American-centered source of supply is a complex challenge that will require cooperation across North America. Authors Bentley Allan, Associate Professor at Johns Hopkins University and Tom Moerenhout, Professor and Critical Minerals Lead at Columbia University make clear that the U.S. alone cannot reduce its dependence on China for critical minerals, and that partnering with Canada and Mexico is needed to expand production and refine many critical minerals and rare earths.

There are already a range of policies in the U.S., Canada, and Mexico aimed at expanding extraction and refining critical minerals and rare earths. The current tax incentives to develop critical minerals in the Inflation Reduction Act (IRA) have helped, as well as the Biden administration’s use of the Defense Production Act to support early-stage mining and 25% tariff on imports of critical minerals from China. In Canada, Prime Minister Justin Trudeau launched a $3.5 billion Critical Mineral Strategy that funds development of critical minerals. Mexico has increased mining of lithium and copper but a ban by former President Andrés Manuel López Obrador on private investment in lithium mining along with risks from organized crime have slowed investment into this sector in Mexico. The U.S. and Canada have a bilateral Joint Action Plan on Critical Minerals which Morehouse describes as “notable for its scope but results have remained largely aspirational” with small co-investments into expanding cobalt and graphite mining. The reality is that despite these policies, investment across North America into critical minerals supply chain is too limited and has not addressed what Moerenhout calls “the structural dependencies on China.” For instance, the large new investments needed for mines and refining capacity require long period of price certainty, yet existing policies have failed to address price uncertainty in the market caused by the risk of being undercut by subsidized Chinese production. New policies are therefore needed if North America is going to incentivize the needed investment and development of know-how to expand production of critical minerals and rare earths. This includes reforming USMCA to create new incentives for companies to invest in mining and refine these minerals.

Contributions to this report from Tom Morehouse, Bentley Allan, Melissa Barbanell, and Leila Aridi Afas include a range of recommendations for updating the USMCA to overcome the challenges in expanding mining and refining of critical minerals. For example, Allen argues for establishing a North American Critical Minerals Club, and Leila Afas from Toyota suggests a Strategic Critical Minerals plan. In each case, the authors identify the need for the U.S. to work closely with Canada and Mexico and other allies to increase supply and guarantee demand for critical minerals as well as minerals for next generation technologies such as iron nitride magnets and perovskite solar cells. The following summarizes the key policies that could make a difference when it comes to expanding North American mining, refining critical minerals, and reducing dependencies on China:

• Apply a common North American tariff against imports of critical minerals while guaranteeing tariff-free trade within North America and be open to expanding this club to additional allies.
• Agree on a list of key critical minerals in calculating regional content values under USMCA and for tax purposes.
• Align remedies (anti-dumping and countervailing duties) and investment screening for mining, processing, and refining operations.
• Harmonize subsidies for investments into critical minerals and support co-investment.
• Stabilize prices for critical minerals with either long-term purchase agreements or contracts for difference that shares risk between the government and the investor.
• Joint procurement to create secure offtakes for mines.
• Develop common and high labor and environmental standards, building on the USMCA labor and environmental standards.
• Improve traceability of critical minerals to identify where they are being mined and processed to help understand progress in reducing dependencies on China and ensure that minerals being imported are not undermining North American environmental and labor standards.
• Share North American geological survey data. So far, the U.S. has led the establishment of the Critical Minerals Mapping Initiative that includes Canada and Australia, but not Mexico.
• Consider stockpiling critical minerals in response to China’s use of export restrictions on critical minerals.
• Support recycling minerals across their lifecycle, which can reduce the need to open new mines in the first place, reduce dependence on China, and minimize the negative environmental impacts from mining.
• Update the Defense Production Act to streamline approvals and raise the budge cap for critical minerals project of acute national security concern to enhance the Department of Defense’s ability to invest in strategic projects.

Building globally competitive EVs in North America

NAFTA and now USMCA has supported the development of an integrated and globally competitive autos supply chain across North America. This means for example that about 50% of the content of cars assembled in Canada comes from the U.S. In her chapter, Diana Páez at the University of Michigan’s William Davidson Institute picks up on the importance of access to critical minerals with a focus on EVs. China has also emerged as a dominant producer of EVs and currently produces around two-thirds of the world’s EVs and 85% of global battery cell production. As Páez explains, when it comes to EVs, the battery is the key technological innovation, and batteries require access to critical minerals. The transition to building EVs will need a North American effort that requires some retooling of existing internal combustion engine (ICE) capacity as well as new investments across the three countries. This will include more investments into development of batteries as well as investing in the infrastructure to support EVs such as charging stations. Since the conclusion of USMCA, Toyota made a $14 billion investment into battery manufacturing in the U.S.—the largest investment in a single place that Toyota has made anywhere in the world. The IRA, with its consumer tax credit tied to local content criteria for critical minerals and battery components has further supported development of an integrated North America EV supply chain. However, Páez notes that it will take several years for these investments to come online, and the problem of reliance on China for critical minerals when it comes to battery production remains to be resolved.

Páez, as well as Shuler argue that the upcoming USMCA review presents a key opportunity to update the agreement to support the development of an EV supply chain in North America. Key recommendations for achieving this are the following:

• Establish a North American Auto Dialogue to take stock of impact of agreements on autos and transition to EVs.
• Harmonize EV standards across North America to support an integrated EV supply chain.
• The three countries should develop flagship projects across the EV supply chain to signal commitment to developing EVs and testing new technologies. This could include expanding binational charging corridors such as ones that already exist between Michigan and Ontario and San Diego and Tijuana.
• Develop a North American approach to reskilling workforce. The work so far on developing a semiconductor workforce could be a model for doing something similar for EVs.
• Agree on a common approach to China when it comes to EVs. In addition to aligning on EV tariffs, more is needed to increase the competitiveness of the North American auto sector and should include trade agreements that also expand market access for U.S. EVs.

Securing leadership in AI

In a co-authored chapter by Claudia Del Pozo and Daniela Rojas of the Eon Institution in Mexico and a chapter by Paul Triolo at DGA-Albright Stonebridge, these authors address how cooperation across North America can strengthen the U.S. goal of retaining global leadership in AI. Under President Biden, the goal, when it comes to competition over AI with China, was to maintain as large a lead as possible.¹ President Trump has stated that the United States’ goal is to “sustain and enhance America’s dominance in AI to promote human flourishing, economic competitiveness, and national security.” The importance of AI for enhancing manufacturing efficiency and reducing costs was also underscored by Judy Marks. Sustaining U.S. AI leadership also requires reducing U.S. dependence on Asia for high-end semiconductors used to train advanced AI models, as well as reducing Chinese access to high-end semiconductors through stringent export controls. As Del Pozo and Rojas note, Taiwan’s TSMC produces over 90% of the world’s advanced AI chips. Canada and Mexico will be important partners when it comes to AI leadership and in building a globally competitive semiconductor manufacturing capacity in the U.S.

The CHIPS and Science Act (CHIPS Act) made available $50 billion in funding, of which over $33 billion has been allocated to leverage an additional $450 billion in private investment into semiconductor manufacturing across the U.S., creating an estimated 115,000 jobs. The CHIPS Act included $500 million for the International Technology Security and Innovation to facilitate collaboration with international partners to enhance global semiconductor supply chain security and diversity. As Triolo describes it, Mexico and Canada will help the U.S. meet its goals when it comes to building semiconductor manufacturing capacity and supply chains in North America. The work here has begun with an assessment of Mexico’s semiconductor regulation and workforce needs. The U.S. government has then led the development of workforce training programs in collaboration with U.S. universities and the private sector.

A related issue here is building data centers that use advanced semiconductors to train AI and for inference. Sourcing energy for data centers will be an issue that will require more attention. This is where energy policy intersects with AI and is another area where the three countries can cooperate to secure the clean energy needed to power data centers for AI.

The upcoming USMCA review provides an opportunity for the U.S., Canada, and Mexico to assess the interoperability of their still developing approaches to AI regulation and alignment of their export controls. For instance, the AI diffusion rule that the Biden administration published in January 2025 limits U.S. exports of cutting-edge semiconductors with licensing exceptions for allies such as Canada, but not Mexico, thereby subjecting Mexico to a range of restrictions in terms of access to advanced computing chips. Del Pozo and Rojas suggest that exception be extended to Mexico, which would be subject to Mexico developing appropriate AI regulation, including ones on export controls and semiconductors. Looking towards USMCA review, the authors propose several ways the agreement can be updated to support AI:

• Agree to continue USMCA and avoid 25% tariffs on trade across North America, which would raise costs and undermine the development of a semiconductor supply chain across North America.
• Align on AI regulation, privacy policies, and cybersecurity to enable the free flow of data across North America and as key building blocks for AI.
• Agree on a common approach to IP standards for AI.
• Develop more systematic AI training measures, including increasing mobility of AI talent across North America.
• Develop common guidelines for creating trustworthy and responsible AI.
• Facilitate cross-border trade in oil, gas, and electricity to support data centers for AI.

Conclusion

The future of USMCA is once again uncertain as President Trump threatens Canada and Mexico with 25% tariffs on their imports. However, these tariff threats point to a more essential challenge for the U.S., Canada, and Mexico, which is how to reform USMCA to build an enduring foundation for trilateral economic relations. The USMCA, as a replacement for NAFTA, included important reforms. But it was not the final destination. To understand what an enduring trade agreement would look like, it is important to state the economic challenges USMCA is trying to solve. For the U.S. at least, the challenges are addressing rising income inequality and reversing the decline in manufacturing that has traditionally been a source of middle-class jobs for blue collar workers. Rising geopolitical competition with China and the COVID-19 pandemic also highlighted for the U.S. that depending on China for key products is an economic and national security risk.

The USMCA is but one tool to address these challenges, but it is an important one. To understand what role USMCA can play, it is important to see the big picture. The U.S. economy is operating at close to capacity. The U.S. has a very low unemployment rate of around 4% and rising labor force participation rate at around 63%. The bottom line is that the U.S. does not have a large labor surplus. This means that efforts to significantly expand manufacturing in the U.S. as a share of GDP will run up against labor shortages. In effect, expanding manufacturing in some sectors will lead to contractions in other sectors of the economy. This is merely another way of stating the obvious point that the U.S. cannot manufacture everything. One solution has been to build trade and investment linkages with Canada and Mexico, giving U.S. industry access to a larger workforce and creating new opportunities to expand manufacturing in the aggregate. This means that if the U.S. is serious about reducing reliance on China and developing more secure supply chains, then more manufacturing will have to happen in the U.S. and also in Mexico and Canada.

Given the reality that more trade with Canada and Mexico is indispensable, the U.S. needs to determine which manufacturing it wants within its borders. Yet, since a lot of manufacturing in North America is part of a broader supply chain, increasing manufacturing in Mexico or Canada often relies on significant U.S. inputs, increasing manufacturing and jobs in the U.S. For instance, research for the Brookings USMCA initiative by Luz María de la Mora, former Mexican undersecretary for trade, showed that almost 50% of Mexico’s intermediate goods imports come from the U.S., and the U.S. accounts for around 14% of Mexico’s exports to the world. In other words, increasing Mexico’s manufacturing and trade also grows the U.S. manufacturing base as well. This means that USMCA rules that increases investment into manufacturing in North America, such as the agreement’s tighter auto rules of origin, is a win for everyone.

In order to expand trade and investment ties across North America in the pursuit of more secure supply chains and less dependence on China, the U.S. must address the ongoing challenge of ensuring trade with Mexico does not put downward pressure on U.S. environmental and labor standards. When it comes to labor standards, the USMCA labor chapter and RRM were important first steps in addressing this issue, but more is needed. USMCA can raise standards in Mexico’s exporting sector, and experience with the RRM points to where further reform of the RRM is needed. But other actions beyond the USMCA will be necessary. This includes implementing Mexico’s labor reforms and reforming its social security regulations that have pushed the labor force into the informal sector where wages and productivity are lower. These are just couple examples of how trade agreements—along with other complimentary domestic legislation—are often needed to effectuate economy-wide changes.

The USMCA is up for review in 2026. This requirement was put into place to ensure that the agreement was regularly reviewed, and if necessary, updated. As part of the review, President Trump has made it clear that he wants to renegotiate the agreement. It was also likely that a second Biden administration would also have pushed for extensive reforms of the USMCA. This political consensus on the need for USMCA reform reflects underlying economic challenges that have persisted since the agreement’s inception. While another USMCA renegotiation creates uncertainty, this upcoming renegotiation presents perhaps the best opportunity to strengthen the trilateral trade relationship. Indeed, a successful USMCA renegotiation could be the most important economic policy outcome for the Trump administration. Not only could it stabilize relations with its two largest trading partners, it would present a foundational model for competing with China—the United States’ single most important foreign policy and national security challenge—and serve as a template for international trade relations with other countries as well.

This report provides a range of recommendations on where USMCA reform is needed. The report also points to a range of other policies that are needed if the U.S. wants to truly decrease its dependence on China for critical minerals, expand production of globally competitive EVs, and remain a leader in AI.